Fintech's as big threats for banks

Interview with Cedric Donck, business angel and experienced entrepreneur in Fintech.
Interview by Ignace Combes and Marion Dupire

Cedric Donck is a professional business angel, he invests in Internet start-ups in Brussels, Paris and Africa, mainly Madagascar, some of them operating in Fintech. He is also teaching entrepreneurship and innovation at Vlerick Business School and in an academy called Virtuology Academy which trains start-ups and scale-ups in different phases of development. Virtuology Academy notably gives trainings in the financial services sector on how Fintechs can impact and attack the banks. Cedric Donck is involved in the start-it@KBC initiative and gave a lot of training at BNP Paribas Fortis. Finally, he created 3 NGOs in Africa to support entrepreneurship, some of hem being related to Fintech and mobile banking activities.

Cedric Donck, can you tell us a bit more about the Fintech start-ups in which you invested?

“I invested in a company called African Markets, a Bloomberg-type of business that promotes stock information on the African stock exchanges. What they do is 3 main things:

assign tickers to companies and link all their financial information to these tickers

provide the annual reports and all the financial information on the publicly listed companies

provide reports about the big studies on African economy done by international organisations such as the FMI

Another Fintech in which I invested in is a mobile business that collects money for prepaid electricity in Africa, it allows people to pay their electricity via their mobile phone. This one is still in the beta phase.”

Why do you think these Fintech start-ups added value to the financial services sector, and what is this added value?

“I don't think that they have so much added value, but they are big threats to the traditional financial sector. The financial sector has not been disrupted yet, in contrast to the media or the technology sectors. In the last 30 years there has been some changes but the evolution was not radical and was never initiated by people that were coming from outside the market. The banks and the insurance companies are still making a lot of profit, so this is a perfect target for Internet companies that come with new business models to capture part of the value. Traditional banks have to sharpen their model and the Fintech’s can be a trigger to push them into changing their normal way of working, becoming more efficient, and accelerating their development. This can be an added value, but it’s combined with a big, big threat.”

Fintech companies attack part of the value chain of banks but also probably need the banks’ infrastructure in order to promote their products. What is your view on this?

“The threats are different according to what part of the financial sector you attack.

Today the biggest part of western banks’ income is coming from granting loans (55 to 60%). Traditionally, some credit committees are taking care of granting loans and are full of inefficiencies. Now we see other models which make use of big data to reduce inefficiencies and have much smaller margins (e.g. Lending Club, Lendico). These companies can accept higher default rates than banks traditionally accept because they win so much on efficiencies.

The second big part of the income of banks is private banking and wealth management. Traditionally the advice is done by people, but now the growth of artificial intelligence allows some start-ups to provide a similar service in a cheaper and more efficient way. While traditional private bankers take 1 percent of the invested amounts, the new models of the Fintech’s take 0.1 percent. Those Fintech’s perform at least as good as traditional advisors and don't have the conflict of interest that often happens in traditional banks. In other terms they are 10 times more efficient, or at least their price is 10 times smaller, than traditional wealth management.

Then you have a third type of income source for the financial sector which is processing payments. What you see there is that systems such as Bitcoin and virtual money in general start to pop up everywhere. In those systems money does not go through the pipes of the banks anymore. This is what we call disintermediation: the volume of money that is managed by banks is going down. And virtual money is not only Bitcoin, my son who studies at the University of Maastricht has a student card which is also a payment card not only for the all services of the University, but also for bars and restaurants. He loads his card once via PayPal and can then cover all his expenses. Those are threats, that are still on the borders of financial services. It’s still small amounts, but people start to use them massively.

We also have to look at telecommunication companies and big players of the Internet such as Google, Apple and Amazon. On the telecommunication side, there is one spectacular story: Orange Telecom. Orange Telecom has been developing mobile payments in Africa, for at least the last six or seven years. In Madagascar today we are paying the salaries of our employees via their mobile phones, and they use it to pay a lot of daily expenses. It is the same in Kenia and in other countries: there are far more people with a mobile bank account, than people with a traditional bank account. And what is interesting is that Orange Telecom early this year, announced that they bought a bank in France, so the learning curve that they went through in Africa is a learning curve that they will use in Europe. Vodafone is also doing similar things. So we will have new entrants on the market, namely big telecommunication companies. On the side of Internet giants such as Google or Apple, they already have virtual wallets in America and of course they have a banking license, which captures a part of the value chain.

If you want to take an image, you have on one side all small piranhas eating small pieces of the flesh of traditional financial institutions, and you also have big sharks, the telco’s, the Internet players, who are also ready to eat big chunks.

Therefore Fintech’s are not the only threats, you also have other technology businesses, telco’s or traditional Internet players that come up with threatening products to the banking sector.”

In your view, how should banks react to this threat, should they consider to team up with Fintech start-ups for example?

“There are different options. About 55 percent of banks have created incubators and support entrepreneurship for Fintech’s. These banks are creating the environment, that allows Fintech’s to develop. In doing so they keep an eye on them, but they are not shareholders, they are not actively involved in those start-ups.

Other banks have chosen to combine the first route with a second, where they actually invest in Fintech’s. Without mentioning names, I can tell that several Belgian banks are now considering to create special Fintech funds.

A third approach is to buy Fintech’s or technology companies. That was the case of ING which bought Qustomer. Through the acquisition of those businesses, they get people with different views who bring in new technologies.

In sum banks can take 3 attitudes towards the Fintech market: -1- create an ecosystem or try to control an ecosystem, -2- invest and have a foot in it, -3- acquire and integrate.”

Do you think that Fintech companies are going to partner with the banks? What is your view in terms of collaboration models from the Fintech perspectives?

“I have mixed feelings here. Two years ago, banks were very arrogant and considered Fintech’s as peanut businesses: let them play, they will never hurt us, we are the strongest, it’s David against Goliath, except in this case they thought that Goliath would win.

Today they see the threats, the banking industry is one of the last industries that is being disrupted. In the media industry, arrogant big press editors never invested in Immoweb when they could, and it has proven to be the wrong choice. Other industries have faced that difficult situation and banks are starting to open their eyes. I think they are more open now. But on the other hand, when you look at the real links that exist between start-ups and banks, and we can quote the example of Sixdots, we see that they don't have the agile attitude that makes the collaboration with Fintech’s successful. As soon as compliance starts to kick in, the Fintech entrepreneurial spirit fades away and either the entrepreneurs leave the Fintech and start something else or the Fintech doesn't take off.

A real mind switch has to take place at banks to become sufficiently agile to work in partnership with Fintech’s. There are success stories, especially in big data management. For instance data.be and different banks have been able to make each other stronger. BNP Paribas Fortis and Co-station managed to build a healthy relationship where everyone understands what its role is in the partnership and work well together.”

About the Fintech themselves, what are their major difficulties at the moment?

“First they have to face all the difficulties that normal start-ups have, except maybe that it is a very sexy market so the access to funding is quite easy. But on the other hand, they have to be very careful on who comes in their funding, because it can also kill the business. Finding smart money in the Fintech world at good rates is not easy in Western Europe.

The other difficulty is the heavy legislation system which makes it difficult to move quickly. It's also quite expensive for investors to know whether they are taking risks or not. MyMicroInvest, for example, has been able to influence the conditions of crowd funding at both the Belgian and the European levels. Customer privacy regulation is also a source of difficulty for Fintech’s. Usually the core of their business is personal data and, in this respect, it is quite expensive to comply with the relevant regulations.”

What is your view on the emergence of Fintech ecosystems such as Eggsplore in Belgium?

“First of all, Fintech ecosystems worldwide are always based where the financial services ecosystem is. The American Fintech ecosystem is not in Silicon Valley but in New York. The German ecosystem is not in Berlin but in Frankfurt. Paris is number 3, and the Nordics are also quite developed.

For me it is a little bit of an illusion to develop a strong Belgian Fintech ecosystem if it is not very close to the Belgian banking ecosystem. I’m very much in favour of building mixed ecosystems. I would also promote the relationship between the IT department of banks and the Fintech ecosystems. It is often the management, the marketing, the commercial people that have links with Fintech’s, and not so much the IT people. But it’s the IT people who should really develop that link.

Finally, IT departments in Belgian banks are in general looked as support departments, and not as strategic players. They are sometimes only executing decisions that the marketing and commercial departments make. The only exception is probably KBC, where in fact IT people are members of the executive committee and define the strategy of the bank as a whole. And they have superb results!

All initiatives that bring Fintech’s and banks together are all really good, because the Fintech’s can learn and eventually exit through the banks, and the banks can learn as well. That is a lot what happens in London, a little less in Germany, less in Paris, and in Belgium it starts but it’s not very developed.”

How do you see the future for the Fintech world, and more generally your scenario for the future of the sector of financial services?

“I don’t think that it’s very different from a normal market that grows quickly. In the beginning it is very fragmented, over time the better ones will take over the smaller ones and at some point, strong Fintech’s will reach a maturity and be able to partner correctly with banks.

I don’t see Fintech’s taking over the whole financial markets. Big traditional banks will still be there, and especially the ones that are open and can work together with Fintech’s. The banks which see the Fintech movement as an opportunity to become more agile and to provide better products will have the best results. In sum the best Fintech’s will consolidate and work with the best institutions, or at least the ones that are the most open. All the ones that do business as usual and deny the threat of Fintech’s will be in trouble in the future.

What is less easy to forecast is the impact that the telco’s and the big Internet players will have on the banking industry. I actually think that their impact might be a lot bigger. It happened in marketing, in media, and in a lot of different sectors. Companies like Amazon and Google might have a real impact on the financial services.”

If there's one recommendation you would give Fintech start-ups, what would that be?

“Sit on your money, do a good product, collaborate with bigger banks and don’t spend your money too fast, only until you really, really have a good solution. And the last thing is go to Germany, to the UK, to New York and to Paris. These communities of Fintech’s are quite open, see what they do and learn from it.”